Our financial services (FS) institutional clients have been leading the way with alignment of climate reporting to the internationally recognised Task Force on Climate-related Finance Disclosures (TCFD) standards, reorganising their governance structures to ensure strong oversight on climate risk and adapting their businesses accordingly.
On the legal side, we have been helping our FS clients anticipate potential dispute risks in this area, including running a core programme that highlights regulatory, litigation and non-legal stakeholder advocacy routes. Offering broad coverage on the current state of play and horizon considerations, we have been advising FS legal teams on pre-emption and risk management strategy across these developing areas, as well as supporting them on contentious matters where relevant. Part of our key coverage on climate disputes is monitoring activity outside the traditional litigation space, where advocates are increasingly using non-court avenues, including complaints mechanisms, to full effect.
The spotlight has recently fallen on alleged inadequacies in climate-related risk reporting and FS clients will want to take note - earlier this week Client Earth (an active NGO in the climate space) reported both Carnival Cruises and Just Eat to the FCA for “investigation and enforcement” as a result of alleged deficiencies in their financial reporting. As well as referring to the companies themselves, Client Earth has also highlighted perceived audit inadequacy “for failing to address climate risk in their audits of the companies’ financial statements” and citing ongoing investor faith in audit standards as a reason to urgently tighten up practices in this area. The types of issues being flagged by Client Earth are insufficient references to climate change, limited commentary on environmental impact of the underlying business and failure to provide detail on how “sustainable” and “green transition” type claims made about the companies are underpinned by practical implementation steps which track Paris-aligned pathways.
In line with our expectations that tension in this area will rise as reporting obligations are enhanced, the FCA is also criticised for failing to hold businesses accountable for reporting infringements to date. We note that this type of frustration with regulatory enforcement avenues is likely to result in action elsewhere and whilst we have not yet seen any litigation regarding climate-related risk reporting issues in the UK, we consider it highly likely that a claim will eventuate in the mid to long term. We are aware that claimant law firms and funders are interested in this issue (with Hausfeld recently assisting Client Earth in producing a report analysing FTSE companies’ climate disclosure, for example). We also anticipate an uplift in complaints to regulators, including in relation to auditors, and increased appetite of regulators to take enforcement action where appropriate. We are keeping this area under close review and would be delighted to hear from you if you would like to find out more about our Climate Dispute Risk offering and how you can stay ahead of the curve on these issues in your business.